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Wed. October 04, 2023
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Beyond the Bernard Madoff Swindle
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By David A. Hollingsworth

Explaining the Cultural and Political Dimensions of the Madoff Ponzi Scheme Phenomenon Bernald Madoff’s sentence on June 29th, 2009 to one-hundred and fifty years in prison was a bitter-sweet historical event in the midst of one of the worst financial crises since the Great Depression. It was bitter because the victims can never recover all of the roughly $65 billion dollars lost in Madoff’s ponzi scheme (the scheme so named after Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi or “Charles” Ponzi, who is one of America’s greatest swindlers in our country’s history). It was also bitter because so much of our faith in the financial system, in our political system, and in our regulatory system, is now lost and much of it may never be recovered, at least for the time being. In short, things will not be the same again: the America we knew is quite gone. But the sentence was quite sweet, not in a victorious sense, but quite sweet nonetheless simply because this bad, immensely selfish and opportunistic guy, is now behind bars, far away from the luxuries that he grew accustomed to for too long. And Judge Denny Chin, of the United States District Court for the Southern District of New York, made sure of that. His message was quite loud and symbolic: that this society will not tolerate this sort of criminal activity. And I think Bernard Madoff got the message loud and clear (and besides, he has all the free time in the world to reflect on what he did and the people he harmed). But in the past dec-ades, did we ever get that message loud and clear ourselves? And it is here where I would like to offer my take on how the Madoff scheme simply should never have become as such, instead should have become a legitimate practice in protecting people’s money in transpa-rent, honest, clear-viewed ways from the very start. But that did not happen. And it is we who must share much of the blame. Swindling, greed, and cheating are not at all new to mankind. We all know that. In fact, we witness and experience these things in their various forms almost every day. Indeed, as a saying goes, the root to all evil is our love for money, not the money per se. However, when there were the collective, systematic collapses of our conscious fortitudes and our concepts of empathy, ethics, commonsense, and fair play, then the Madoff scandal becomes less of a surprise and more of an expected reflection of how we have gone down that road over the years in the first place. Needless to say, the Madoff scandal was long in the making. And here is how it happened. The culture of complacency, accumulation of wealth, conformity, and materialism, had become such a force in our society that it had severely dis-torted the very concepts of what was fair, what should have taken priority, and what made sense, especially for the long-run (just look at housing and credit). It was that complacency which resulted in our one-dimensional, excessive idolization towards the people who not only made the money, but towards some of those same people who also controlled it. Former Federal Reserve Chairperson Alan Greenspan immediately comes to mind. For example, throughout the 1990s, there were speculations of what Greenspan would do with the monetary system based on the size of his briefcase (and people with papers and cameras literally ran towards him to gaze at his case as he was getting out of his car for his Fed meet-ings). If his briefcase was slim, then the economy was sound enough for the interest rate to remain unchanged. But if his briefcase was thick, then such a change was quite imminent. This underscores how people like Greenspan were revered, so much so that it became something of a no-no to question and even challenge his policies. And when a minority of people began to do so, such as, for instance, pressing the need for tighter regulatory controls over financial instruments such as derivatives and credit default swaps, they were effectively silenced and admonished. The need for the truth-seeking and the truth-telling was simply too overwhelmed by the desire to just keep the ball rolling, no matter what lied underneath the surface. No matter of the consequences. Think of Ms. Brooksley E. Born, a retired partner of Arnold and Porter in Washington, D.C. who, as head of the Commodity Futures Trading Commission (CFTC) from 1996 to 1999, be-gan to sound the alarms of the dangers of opaque trading of derivatives. This hero made plenty of sense, even in retrospect. But the then Secretary of the Treasury Robert Rubin, his deputy Lawrence Summers, and Greenspan, would not have any of it and resisted her calls for greater regulations over the financial instruments. In response, Congress, in 1998, froze the Commission’s regulatory authority for six months (Peter Goodman, 10/08/2008: p. 3). Crestfallen and fed-up, Ms. Born left the position in 1999, the same year President Clinton signed into law the Gramm-Leach-Bliley bill that effectively repealed the Glass-Steagall Act of 1933, which was designed to curb banking activities and control speculation. A regrettable occurrence no doubt, for less than a decade later, the financial collapse that started in 2007 due to the bust of the housing bubble reeled its ugly head and destroyed the livelihoods of so many people not just in the United States, but much elsewhere. Just look at Iceland and the Ukraine. And while you’re at it, look also at the current global food and financial crises where one billion of our people are now facing hunger under grinding poverty. And people like Bernand Madoff (and Robert Allen Stanford of Stanford Financial Group come to think of it) fit that category. Madoff, from his early years, had a knack for the finan-cial markets and how they worked. Under the noses of the government and regulatory bo-dies, Madoff’s Wall Street firm, Bernard L. Madoff Investment Securities LLC, at first made markets (by quoting bids and asking prices) via the National Quotation Bureau's Pink Sheets before functioning as a third-market provider, which bypassed exchange specialist firms by directly executing orders over the counter from retail brokers. A known philanthropist, Madoff excelled in payment for order flow, which entails a dealer paying a broker for the right to execute a customer's order (known as a legal kickback-a questionable practice for some for ethical reasons). But some of the practices began to arouse suspicion and Madoff’s investors were urged to at least diversify their investments. But because Madoff garnered so much admiration and trust, the urgings fell on deaf ears. And when financial analyst Harry Markopoulos began to inform the Securities and Exchange Commission (SEC) as early as 1999 that Madoff’s gains did not add up legitimately and legally, he was effectively dismissed. By then, Madoff was already well connected: the politicians simply loved him and his money he contributed to them. Due to our complacency and our bubble thinking (that is, the thinking that our economy was strong enough to overcome any shocks and surprises no matter what many of us did), we by and large did not give the Madoff development a second thought. Besides, have we ever questioned, persistently, how these financiers made millions and even billions of dollars while contributing little of real value to our society’s well being? And as our culture became increasingly exploitative, opportunistic, adversarial, cutthroat, partitioned, and small-minded, most of us did not bother to care (at least not enough). Many of us excessively looked-up to those who made the money and the glitter, even to the point of overlooking and doing-away with those who didn’t make that vast fortune, but who just simply strived to live good lives and to make a honest living. A growing number of people were pushed (both directly and indirectly) to get MBAs and JDs because in the financial and legal fields, that was where the money and the glory were at. Of course, when those fields became oversaturated over time, then a whole bunch of us ran into problems with massive accumulated debt obligations. So much for the glory. And when the conscious-minded people began to speak out and warn us of what was to come (including some academics and economists who saw this current financial crisis coming), they were effectively rebutted and even ridiculed. But to be blunt though, we went in on the ride when we shouldn’t have, and we know it. We went in on the ride with those who did the things that they should not have done, and we know that too. We knew what we were doing back then, and why. And besides, why not (we routinely rationalized to ourselves and to each other). Why should we have idolized (and cared for and listened to) those people who were not making the money and living up to what was expected of them? What did they know? There was a time in our culture when talent, creativity, and achievements counted a whole lot, and we associated ourselves with those with the knowledge and the desire to make a dif-ference and to effect change. We were curious about each other and what we were made of. We cared very much about the future. Over the past decade or so, however, much of those qualities that made us unique and special withered to alarming levels as we had become more clued to what people were making, and not necessarily how they were making it and for what goal. The trust and awe towards people like Madoff stemmed in part from our lazi-ness and arrogance that hindered the need to find out the truth and to react accordingly. The trust and awe in people like Madoff stemmed in part from our illusions that the wizards in Wall Street and in Washington, D.C. knew exactly what they were doing and therefore noth-ing could ever go wrong (at least in the magnitude we are experiencing today). Finally, the trust and awe in people like Madoff stemmed in part from our collective mindset that re-warded gains and acquisitions, and not always for the hard work, accomplishments, hard-decisions, honesty, and sacrifices most of us were making (and continue to make) for a brighter, more promising future. In other words, he monster in Madoff was the monster of our own doing, because we did not care enough to look beyond the scope of the immedia-cies of the given moments. We did not care enough for the truth and were short-sighted. The current financial crisis was largely a result of what we did to ourselves, what we did to each other, and what we did to the system that was designed in the first place to protect us from the very debacles we are witnessing at this very moment. Over the past couple of weeks, people began to raise their voices against President Obama’s health care reform proposals in the town hall meetings that commenced in numerous muni-cipalities of the United States. And while I did not always find myself in agreement with what many of them had to say, to be vocal and passionate like that is a darn good thing. Fi-nally, I said to myself, here is more of that organic, collective sense of passion and conviction concerning the future of our country that went missing for too long. The people at those meetings are finding themselves wondering how the whole series of reforms introduced dur-ing the past six months will pan out without sacrificing our fundamental freedoms and with-out placing too much burden on the next generations of people. That too is a darn good thing. I remember a woman earlier today in one of those meetings who declared rather de-terminately to Senator Specter (D-Pennsylvania), “you have awakened a sleeping giant….” But as far as creating ways in making America a better America, I find myself wondering, how on earth did we manage to get away with that lack of vigilance for so long? A bubble and our bubble thinking just waiting to burst I suppose. But then, why were our voices, which are noisier now, not as noisy, and collective, and more constant way back then when we had the chances? I think I have answered that one the best I can, but with that heavy feel-ing of regret of what could have been. Selected Bibliography: Goodman, Peter S. “The Reckoning: Taking a Hard New Look at a Greenspan Legacy.” New York, The New York Times, 8 October 2008: 1-4. http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?pagewanted=1

David A. Hollingsworth is author of The Rise, the Fall, and the Recovery of Southeast Asia’s Minidragons

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